What's new
On December 3, 2021, the National Healthcare Security Administration and Ministry of Human Resources and Social Security issued the new 2021 National Reimbursement Drug List (NRDL). Zhejiang Medicine’s (ZMC) nemonoxacin product for injection is included in the NRDL, with an ASP of price (a bottle of injection [250ml] contains 0.5g of nemonoxacin malate and 2.25g of sodium chloride) is Rmb84.8.[1]
Comments
About Nemonoxacin: Nemonoxacin is a new-generation quinolone antibiotics (fluorine-free) jointly developed by ZMC and TaiGen Biotechnology. Nanofloxacin malate capsule was approved for marketing in June 2016, and the capsule’s dosage form was included in the NRDL at end-2019. In 1H21, sales of the medicine reached Rmb45.88mn. In June 2021, nanofloxacin malate and sodium chloride for injection received approval for marketing.
Bullish on future sales ramp-up of nemonoxacin. We think nemonoxacin is a potential substitute of moxifloxacin (rolled out in 1996) and levofloxacin (rolled out in 1998), as it has similar efficacy but is safer and initiates more active antibacterial activities against drug-resistant, gram-positive coccus. Therefore, we believe it can meet market demand for product upgrading. According to data from Menet, sales of quinolone antibiotic injections at physical hospitals account for 80% of the medicine’s overall sales. We believe inclusion in NDRL will boost sales growth of nemonoxacin for injection. Currently, centralized procurement of levofloxacin for injection has started, and we expect that of moxifloxacin to start in the future as well. Post centralized procurement, we estimate the market size for the two products will decline to Rmb2–3bn from Rmb9bn. Given nemonoxacin’s competitive efficacy, we are upbeat that it will likely become a major quinolone antibiotic medicine due to the centralized purchase policy for rival products moxifloxacin and levofloxacin.
Clinical trials of antibody-drug conjugates (ADC) progressing. ARX788, ZMC’s primary ADC drug, was jointly developed by Ambrx and ZMC. The drug has shown similar clinical performance as other anti-HER2 ADCs. At present, ARX788 is still in phase II and III clinical trials for breast cancer and gastric cancer. We expect the drug to show strong antitumor activity and suggest watching clinical data. We expect ADCs and nemonoxacin to offer growth drivers for the company moving forward.
Valuation and recommendation
We maintain our 2021 and 2022 earnings forecasts and introduce our net profit forecasts of Rmb1.27bn and Rmb1.44bn. The stock is trading at 12.9x 2021e and 11.3x 2022e P/E. We are upbeat on the rapid growth of Vitamin E business and the growth potential of the company’s innovative drug business. We maintain an OUTPERFORM rating and a target price of Rmb24.15 (based on SOTP valuation method), implying 18.4x 2021e and 16.2x 2022e P/E with 43.0% upside.
Risks
Lower-than-expected product prices; progress in the R&D of ADC disappoints; nemonoxacin sales weaker than expected.